Q3 reporting look ahead: A tale of two cities

by from interactive investor |

"It was the best of times, it was the worst of times" sums up these two great cities now. Richard Hunter, interactive investor's head of markets, studies the upcoming results season.

The two cities in question here are London and New York, and the fortunes of those markets are in stark contrast.

In the year to date, the FTSE 100 has dipped 2.3%, while the S&P 500 Stateside has added 5.3% and the Dow Jones Industrial Average 8.5%.

Within the FTSE 100's disappointing performance, there have of course been some stocks which bucked the trend - but the net effect is a downward move, more recently hampered by something of a recovery in sterling (lessening the value of overseas earnings, estimated to be responsible for some 70% of the UK's premier – and global – index) and a particularly weak August.

As such, in terms of the impending third-quarter earnings season in the UK, investors may wish to consider a "bottom-up" approach to identifying promising stocks, as opposed to a general "top-down" attitude (which incorporates the macro-economic picture) or indeed a simple tracker.

For the US, the situation is markedly different.

Expectations are high and moving higher. This is not surprising given the fact that the US economy is currently firing on all cylinders, propelled by the lingering effects of the previous tax cuts, a monetary policy which remains loose and companies which are reaping the rewards of a benign environment.

Not surprisingly, this fed through into half-year earnings, where nearly 80% of US companies reported positive earnings surprises and over 70% reported higher than expected sales.

Going into Q3, a recent report by FactSet (a US financial data company) anticipated earnings growth of 19.3% for the quarter (which would mark the third highest earnings growth since the beginning of 2011), mentioning that 74 S&P companies have issued negative earnings per share guidance and 24 positive. It is important to note here that running into a quarterly reporting season earnings hopes are often massaged down to manage investor expectations.

Perhaps more representative is the current view of nearly 11,000 ratings which FactSet covers. Of those, 53% have 'buy' ratings on the S&P 500, 42% are 'neutral' and just 5% have 'sell' ratings.

Although the strength of the US market has been broad, the technology stocks have been grabbing many of the headlines, which is hardly surprising given that Amazon (briefly) topped the $1 trillion-dollar market capitalisation recently, while Apple remains there. 

The share price performance of the FAANGs over the last year is generally stunning – Facebook is probably the exception, having dipped 3.6%, with Apple up 51%, Amazon up 102%, Netflix up 104% and Google (now known as Alphabet for the market listing) up 26%.

The head of the Federal Reserve, Jerome Powell, is also unabashed in his praise of the US economy, having recently and variously described it as "particularly bright", "remarkably positive" and "extraordinary", adding that "There's really no reason to think that this cycle can't continue for quite some time, effectively indefinitely".

A brave forecast indeed.

However, bull markets do not die of old age, they stop because something has changed. And if US companies continue to shoot the lights out in the third quarter, so should the markets there.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.